Analysts say upwards of nine out of 10 acquisitions fail. I won’t disagree. The dynamics involved in merging two separate organizations and coming out on the other end a sum greater than the two parts is no easy task. In my 20 years in technology, my company has been acquired three times and I’ve acquired more than 40 companies. I’ve seen how to do it right – and how to do it wrong.
EMC acquired my company, Documentum in 2003. I have to admit the integration of the two companies seemed daunting: We built software, EMC primarily built hardware. We were small, EMC was large. We were West Coast, they were East Coast. Any one of these challenges could have doomed the merger. Yet Documentum is now a thriving part of EMC Software – a roll-up of more than 20 successful acquisitions over the past three years.
Making successful technology acquisitions is not a matter of luck. EMC’s success comes from a focused methodology that starts with identifying the right target companies and doesn’t end until years after the merger is completed. Here’s a snapshot of EMC’s approach, which many view as the benchmark for successful technology acquisitions.
M&A has become an integral part of our success at EMC. We spend more than a billion dollars annually to build technology well, but our aggressive acquisition strategy has proven to be the key to moving into new markets and augmenting our product portfolio.
The decision to acquire a particular company begins with the business unit. The business leaders develop a product forecast which lays out the future of the product group and provides a roadmap for how to get there. This forecast determines what capabilities need to be built, partnered for or acquired. The objective may be to win a market, capture customers, or move into an area adjacent to current markets.
Very rarely is a company purchased because it approaches EMC with a compelling offer. The decision to buy comes from a proactive, strategic analysis by the business unit.
Identify core vs. context
Once the need for a product or service offering is identified, a critical decision needs to be made: is the offering core to the success of the business or is it context? If the answer is core, it is better to build it internally or to acquire a company with the offering. If it is context, it is easier to partner for it.
At EMC, we are constantly making decisions about core and context, building and buying. Our business is information infrastructure and information life cycle management. Offerings not directly related to these initiatives end up on the cutting room floor.
Look for flexibility
Part of the formula for merger success involves flexibility. EMC has a very elastic model, and we look for companies with natures that are equally flexible. Very often this translates into buying smaller rather than larger companies – but not necessarily.
Scalability is key. Can the acquired product scale up into an enterprise class offering? Or can it scale down for small and midsized businesses? Small companies often have the advantage of being more flexible[ yet midsize companies can typically scale better.
Another important gauge of flexibility is the potential for internationalization: how easily can the product be internationalized and localized for new geographies? American companies aren’t always the best at this. Does the product have Unicode support? Does it have right-to-left (RTL) and left-to-right (LTR) user interface support Can it be run from both a right- and left-hand orientation? A lack of international potential can be a deal breaker for EMC. We have 12,000 field salespeople around the world and must be able to leverage acquisitions globally.
Embrace a philosophy
After buying 50 companies, EMC has learned from experience what works and what doesn’t. The result is a sort of philosophy about acquisition called “The 3As,” which has helped the company integrate acquired companies successfully.
- Alignment. When acquiring, it is critical to align the new company’s capabilities in order to create the maximum leverage from the bigger company. Field operations need to be integrated with the way that EMC goes to market, channel programs are integrated into our “Velocity” program, product reviews are combined with our review board, and so on. By immediately giving the smaller firm access to the power of the large firm, the benefits of the acquisition appear more quickly.
- Accountability. Management of the acquired company must stay responsible for and emotionally attached to the company they built. If not, it is easy to lose a small company inside a big company. After acquisition by EMC, I remained fully accountable for Documentum’s performance and integration for six months and retain certain aspects of responsibility even today.
Very few reputable acquirers will work with CEOs looking to acquisition as a way to unload their companies and move on. At EMC, that CEO’s responsibilities start on the day of acquisition and don’t end until the goals of the business plan are met. This accountability and consistency helps guarantee success.
- Autonomy. It is critical to allow the acquired company the autonomy it needs to retain its value. At first, only crucial pieces are integrated (as specified in “Alignment,” above) while innovative and cultural aspects remain distinct. As the years go by, it may become possible to integrate the two companies further but only after the risk of “smothering” the acquisition dissipates.Another benefit of autonomy is operational momentum, or what we casually refer to as “Don’t break revenue.” For example, autonomy allows EMC’s storage systems business to continue to operate its business plan with competitors of the acquired company and allows the acquired company to maintain partnerships with traditional EMC storage competitors.
Define a methodology
Successful acquisitions are hard work. The full life cycle of an acquisition requires careful attention and dedicated managers. When acquisition strategies aren’t organized into a clear program, the chance for failure increases dramatically. At EMC, the process for acquiring a company involves three key groups.
- Business units – As explained above, individual business units proactively recommend opportunities for acquisition based on the strategic product roadmap for each division.
- Business development - Working with the business unit, the business development team begins by identifying and analyzing targets. This group handles the negotiation process and creates the framework for the deal. During the entire process, the team works closely with the business unit as well as top management.
- Integration management unit – The IMU has responsibility for integrating the acquired company, particularly during Day 1-90 operations. Everything from the deal announcement to providing email, voice mail and “Welcome Kits” on Day One is handled by the IMU so that the acquisition appears transparent and runs smoothly. The business unit and business development remain closely involved with the integration as well.The IMU also tracks post-integration progress, measuring how the deal performs vs. the original plan and reporting progress to the board and investors. And this monitoring process isn’t taken lightly; EMC continues to monitor progress on acquisitions dating back to 2003.
View the whole
When I look back at the M&As I’ve witnessed during my entire career, the most common mistakes typically result from a lack of taking into account the complete picture of the target company. Finance officers and bankers are always focused on the financials, analyzing how the acquisition is accretive to the business and the potential return it will deliver. A thorough financial analysis is rarely, if ever, overlooked.
What is overlooked are two other critical areas: employees and customers. Virtually all of the assets of the acquired company sit with the customers. The ability to seamlessly integrate the two companies and their products, instill confidence in the merged entity and retain customer satisfaction will greatly contribute to the success of a merger. Ignoring these customer-related aspects will spell disaster.
In the same way that customers represent a company’s revenue potential, employees hold the passion and emotion of the business. If they leave, that spirit goes with them. I would argue that a significant percentage of M&A deals that fail do so because the merger caused key employees to leave.
The DNA that has been built inside a company includes the ability to attract and retain talent – an asset not listed on any balance sheet. It is critical to respect and leverage the entrepreneurial spirit of the acquired company, as well as insist on retention contracts, so that the lead talent will stay.
A focus on keeping employees of acquired companies happy is one aspect that has greatly contributed to EMC’s positive M&A track record. Again, consider the Documentum deal. I’m sitting here in the original Documentum office, in the East Bay, near San Francisco. At the time of the acquisition, EMC didn’t have any operations on the West Coast, yet they recognized that in order to retain Documentum’s talent, the company needed to keep these offices.
Merged companies can absolutely gain by optimizing the costs related to real estate and duplicative functionality – but only where the benefit outweighs opportunity cost. People make products; and in order to realize the value of the products in an acquired company, it is important to try to keep the people happy.
Success speaks for itself
Since EMC acquired Documentum less than three years ago, the business has doubled in size. We could not have achieved that level of growth had we not merged with EMC. I remain an employee of EMC , as do several other CEOs of companies acquired by EMC. That’s not a very common staffing situation in today’s consolidation-frenzied software ecosystem.
There are many different approaches to acquiring companies. What works for one company may not work elsewhere. But EMC’s level of success speaks for itself: Software now accounts for about $3.5 billion of EMC’s total $9.7 billion in revenue.
After 40-plus acquisitions, EMC continues to grow our acquired businesses and innovation continues to thrive within them and across the company. We’ve retained talent, satisfied customers, gained market share and integrated offerings. If you compare those results to other recent high-profile software industry mergers, I think you’ll agree that there is a method to EMC’s M&A “madness.”
Dave DeWalt is president of EMC Software.